Article Excerpt: Bernanke told the panel that most signs point to stabilizing financial markets and an economy tiptoeing out of recession. He said the Fed would carefully calibrate its withdrawal of ultra-low interest rates and the cash flood it has pumped in the financial system, he said.

"We are ... keenly aware that, to ensure longer-term economic stability, we must be prepared to withdraw the extraordinary policy support in a smooth and timely way as markets and the economy recovery," he said. "Determining the appropriate time and pace for the withdrawal of stimulus will require careful analysis and judgment."

It seems no one is concentrating on the fact that the fed's loose, cheap credit and horrendous leveraging caused all this shit in the first place. If they are in fact serious that they are competent regarding the financial crisis, shouldn't they have been competent enough to for see the consequences of their guilty policies?

Nov. 30 (Bloomberg) -- The Federal Reserve said it will test one of the tools for an eventual withdrawal of the central bank’s unprecedented monetary stimulus while stressing that the trials themselves don’t represent any change in policy.

The New York Fed said it will conduct “small scale, real value” three-way reverse repurchase transactions in coming weeks. The tests are “a matter of prudent advance planning by the Federal Reserve,” the statement said, and “no inference should be drawn about the timing of any change in the stance of monetary policy in the future.”

Policy makers led by Fed Chairman Ben S. Bernanke are considering how to withdraw the more than $1 trillion they have pumped into the financial system to combat the deepest recession since the 1930s. Along with raising the overnight bank lending rate, Fed officials have said they may use reverse repos, pay interest on excess bank reserves and sell securities directly to investors to withdraw or neutralize cash in the banking system.

“We don’t think it’s any indication that they’re likely to implement an exit strategy soon, or even in the next several quarters,” said Michael Pond, an interest-rate strategist in New York at Barclays Capital Inc., one of 18 primary dealers that trade with the Fed. “It’s important for the Fed to make sure the market is aware that the tools they do have work, even if they’re not ready to use them yet.”

The Fed cut its benchmark interest rate to as low as zero last December and adopted asset purchases as its main policy tool. The Fed is buying $1.25 trillion of agency mortgage-backed securities and about $175 billion of housing agency debt. The Fed in October completed a $300 billion program of U.S. Treasury securities purchases.

The Fed on Nov 4. repeated it will keep interest rates near zero for “an extended period” and specified for the first time that policy will stay unchanged as long as inflation expectations are stable and unemployment fails to decline.

Payrolls in the U.S. probably fell by 120,000 workers this month, according to the median of 67 analysts surveyed by Bloomberg News ahead of a Dec. 4 Labor Department report. The unemployment rate probably held at 10.2 percent, a 26-year high.

The world’s largest economy has lost 7.3 million jobs since the recession began in December 2007. The jobless rate is projected to exceed 10 percent through the first half of next year, according to the median forecast of economists surveyed this month.

The reverse repo transactions are being conducted to ensure “operational readiness” at the Fed, clearing banks and primary dealers, today’s statement said. They will have “no material impact” on the availability of reserves or on market interest rates, it said.

“You could look at it as a case of due diligence by the Fed,” said Ward McCarthy, chief financial economist at Jefferies & Co., also a primary dealer.

In a reverse repo, the Fed loans securities for a set period. At maturity, the securities are returned to the Fed, and the cash to the dealers.

Market Rates

The transactions will be conducted at current market rates, and the aggregate amount outstanding “will be very small relative to the level of excess reserves,” today’s announcement said. The results will be posted on the New York Fed’s Web site and will be listed as liabilities on the Fed’s consolidated balance sheet statements.

The New York Fed said on Oct. 19 that it was working with market participants on how it would use reverse repurchase agreements to help drain cash. It also said the central bank was considering expanding the counterparties for reverse repo operations beyond the 18 primary dealers.

To contact the reporter on this story: Christopher Wellisz at cwellisz@bloomberg.net